Looking Ahead – Which Way Do We Grow?

“Behold the turtle. He only makes progress when he sticks his neck out.”
– James Bryant Conant

This year our team has spent a healthy amount of time interacting and consulting with A/E and environmental owners, executive teams and boards of all shapes and sizes on evaluating various strategic alternatives and ways to enhance shareholder value. Like a football coach drawing plays on the chalkboard, every option potentially looks like a touchdown until you actually have to play the game.

For some organizations, it’s been another year of frustratingly slow progress, of gains that come in fits and starts and the breakout momentum that rarely happens due to a never ending list of “almosts” and “shoulda beens” (e.g., fewer mega projects to pursue, key contracts still on hold, etc.). However, other firms are having a banner year of record top and bottom line performance despite a 2% GDP climate, a moribund single family housing market, federal and state budget blues, and a tougher competitive environment than anyone can remember.

Talk to leaders in the latter group and what leaps out at you is that there is no one ideal model to consistent, profitable growth. Some have grown through organic means and tighter organizational and project discipline, some via acquisitions and bold ventures, while others have benefitted from cyclical market timing and just plain luck. However, these organizations are also embracing something that has been seriously lacking over the last few years – taking risks! I’m not talking about the “bet the house” type of risk with win big/lose big ramifications, but the steadfast courage and leadership to not become paralyzed by inaction and watching competitors pass you by.

Fortunately, the A/E industry is in a healthier financial position today. Cost cutting exercises are mostly in the past and many firms are well capitalized and possess strong cash positions. Leaders seem more eager than ever to reinvigorate or maintain their growth pace. Getting your firm from here to there in this environment takes planning (of course), communication, execution, as well as a certain (healthy!) paranoia to not become complacent when things seem to be going their best.

Here are some of the growth alternatives firms are utilizing:

  • Hiring Outside Talent – For the majority of A/E firms, it’s common for management to home-grow their technical and business development talent. It creates and diffuses a culture, process and legacy for successful client relationships and project execution. Unfortunately, leadership succession is becoming a huge structural challenge for our industry and many firms will simply not have younger principals with the skills and business acumen ready and available to lead in the future. Boards are increasingly tapping seasoned outsiders to lead at the executive levels to bring new perspectives on organizational structure, marketing, and overall strategic direction.
  • Adding new service lines/market sectors – One of the biggest challenges for A/E firms is to “change your stripes” and enter completely new markets or service lines. During the height of the recession, land development firms tried to become municipal engineering experts, companies of all disciplines rushed into the federal sector, and architecture firms morphed into sustainability consultants. While much of this was done for pure survivability, adding a new service line or entering a market sector ultimately takes a much longer horizon. The risk to this diversification is that core clients can become confused, thinking you were an expert for one aspect and now you are serving a completely different base and needs. Another risk is that are you jumping into a hot sector (yesterday’s residential development could be today’s shale play?) that will inevitably cool. However, based on larger market trends or emerging client demands, certain prospects and market opportunities may appear too good to pass up. Look before you leap.
  • Opening new offices – The reality is that it has become increasingly harder to cold start new offices today. New branches are initially expensive and bring high opportunity costs without a solid client or prospects to make an easy transition. Younger principals are often reluctant to relocate to help launch an office, given that many home values are still underwater. However, the truth is that in order to grow you must have a local presence with certain types of clients, and those are hard to cultivate and service two time zones away.
  • Acquiring other firms – Of course, the alternative to the “build” approach is to buy, and many firms are ramping up their M&A initiatives, seeking targets that will help them expand quicker into new regions, markets or client bases. From our perspective, it continues to be a “buyer’s market” as demographic patterns alone have the number of net sellers of shares outnumbering either the internal or external demand for them. And while integration risk and cultural and operational differences always have to be managed, when properly executed M&A remains a powerful tool for strategic growth.
  • Revamping business development models – The glory days of the 2000s where phones would ring off the hook seem to be a quaint reminder of headier times. As the overall “pie” has shrunk for many firms, there is a premium today on taking market share away from others and that has often involved a top-to-bottom review of marketing practices for a challenging new era. Leadership teams are becoming more proactive with social media channels and outreach, undergoing new branding initiatives, and training principals and project managers on developing valuable communication and sales capabilities.
  • Implementing new ownership and incentive compensation models – Maximizing performance for some organizations has also involved a critical assessment of their ownership models and incentive compensation practices. Getting shares in the next generation’s hands either directly or through phantom stock, synthetic equity or stock options is critical to linking efforts to rewards for the firm’s top performers.
  • Selling the firm – While selling one’s A/E firm is often done primarily for ownership transition purposes, it is also viewed by many as a growth strategy. Larger firms often have deeper managerial, marketing, recruiting and financial resources to help a smaller firm grow, while leveraging cross-selling potential and other organizational synergies together.

Certainly there are other growth avenues A/E firms are pursuing. However, keep in mind that all of these initiatives require a foundation of sound firm and project management discipline, such as open book management, timely cash collection, effective client communication, and investments in new information technology. As organizations look ahead to 2013, it helps to have an “everything on the table” mindset in terms of growth possibilities in your playbook. Happy New Year indeed!